21.2.

2002 EN Official Journal of the European Communities C 48/89

Opinion of the Economic and Social Committee on ‘Economic Growth, Taxation and Sustaina- bility of Pension Rights in the EU’

(2002/C 48/22)

At its plenary session on 29 March 2001 the Economic and Social Committee decided, under Rule 23(3) of its Rules of Procedure, to draw up an opinion on ‘Economic Growth, Taxation and Sustainability of Pension Rights in the EU’.

In accordance with Rules 11(4) and 19(1) of its Rules of Procedure the Committee set up a sub-committee to prepare its work on this subject.

The subcommittee ‘Economic Growth, Taxation and Sustainability of Pension Rights in the EU’, which was responsible for the preparatory work, adopted its opinion on 19 October 2001. The rapporteur was Mr Byrne and the co-rapporteur was Mr Van Dijk.

At its 386th plenary session (meeting of 29 November 2001) the Economic and Social Committee adopted the following opinion by 90 votes to two with 2 abstentions.

1. Introduction 1.5. The Committee recognises the large amount of work

done by the Commission in recent years to focus attention on this critical issue. The latest Communication from the Commission ‘Supporting national strategies for safe and1.1. The provision of adequate pensions to retired people sustainable pensions through an integrated approach’ (2) buildsis a key element in the overall structure of European social on the work of the Economic Policy Committee and the Socialprotection whereby pensioners enjoy a degree of income Protection Committee.security.

1.5.1. The Communication proposes the open co-ordi-

1.2. In recent years studies undertaken by the Commission nation method should be used which, without departing fromand others have drawn attention to the changing demographic the subsidiarity principle, will establish common objectivesstructures in the EU and the potential risk this may pose to the and commonly agreed indicators for the Member States. Thefinancial sustainability of pension systems. The Commission objectives are grouped under three broad headings:for example has stated that ‘The combination of the threepillars making up pension systems offer an unprecedenteddegree of prosperity and economic independence to older — adequacy of pensions;people in Europe. The prospect of population ageing and theretirement of the “baby boomer” generation represents a majorchallenge to this historic achievement. Population ageing will — financial sustainability of public and private pensionbe on such a scale that, in the absence of appropriate reforms, schemes; andit risks undermining the European social model as well aseconomic growth and stability in the European Union (1)’. — modernisation of pension schemes in response to chang- ing needs of society and individuals.1.3. In addition to the demographic issues attention mustalso be given to the need to adapt pension systems to changingneeds of society and individuals. 1.5.2. Although this opinion was initiated before the Com- mission’s Communication (3) was published the Committee believes that this opinion addresses the pension issues raised in the Communication in sufficient detail to enable the1.4. The ESC regards the general sustainability of pensions Committee to endorse its objectives subject to the commentsas a crucial issue and has therefore undertaken this own-initiative opinion to examine this issue and the importance ofeconomic growth and taxation to achieving a solution.

contained in the Committee’s opinion referred to in the next 2. The demographic issueparagraph. 2.1. The demographic studies point to a clear conclusion that the number of older people will rise sharply in relation to1.5.3. The Committee is drawing up an opinion on the the number of people of working age. In its CommunicationCommunication which will focus on certain aspects of consist- dated 3 July 2001 the Commission states ‘The old ageency between the policies involved and the methods for dependency ratio will start to rise rapidly in the next decadedeveloping cooperation in this area. Consequently the two and double by the year 2050 compared to today’ (1) (seeopinions are complementary and together make up the Table 1).Committee’s contribution to the ongoing debate. (1) COM(2001) 362 final.

Table 1: Baseline projections of old age dependency ratios in EU Member States (65+ over people aged 20-64 years)

% 2000 2010 2020 2030 2040 2050

B 29,5 31,1 38,0 48,8 53,5 52,0

DK 25,5 29,6 35,7 42,0 47,0 43,7

D 28,0 34,1 38,6 50,3 57,0 56,1

GR 30,2 33,6 38,0 44,4 54,7 61,6

E 28,7 30,7 35,2 44,7 59,8 68,7

F 28,5 29,5 38,1 46,4 52,1 53,2 IRL 20,3 20,5 26,2 32,1 38,4 46,6

I 30,7 35,5 42,1 52,9 67,8 69,7

L 24,8 27,6 33,0 42,5 47,2 43,5

NL 23,1 26,2 34,7 44,2 50,1 46,9

A 26,3 30,1 34,5 47,0 57,0 57,7

P 26,7 28,5 32,2 37,2 46,3 50,9

FIN 25,9 29,7 41,4 49,5 49,7 50,6

S 30,9 33,8 39,8 45,4 48,9 48,5

UK 27,8 28,5 33,9 43,1 49,1 48,5

EU–15 28,3 31,4 37,3 46,8 55,0 55,9

2.2. This arises firstly from the improved health and living could have a positive effect. Others dispute this: the Com-conditions which EU citizens enjoy which is leading to an mission, for example, considers that even though immigrationincrease in average life expectancy. Indeed the Commission is likely to increase, the dependency ratio will not improve.points out that all previous forecasts have tended to underesti-mate the rise in average life expectancy so that current forecastsare more likely to be exceeded than under-achieved.

2.3. Secondly there has been a significant fall in the

fertility rate, which in some Member States is now below thereplacement rate. In this context, the ESC refers to its previous opinion on immigration policy. If the aim is to adopt a pro-active immigration policy, it is necessary to develop an effective2.4. In the debate about the affordability of pensions, policy of social integration, so that the EU and immigrantsvarious people and bodies are pointing out that immigration benefit fully from the situation.21.2.2002 EN Official Journal of the European Communities C 48/91

2.5. The overall position therefore is that the old age GDP in 2030 a rate that could not sustained within the currentdependency ratio will rise significantly over the next 30 to goal of sustainable public finances (see Table 2). Currently40 years. This will have implications for the financing of pension expenditure averages 12 % of GDP in the EU. Itpension systems. should be noted however that these average figures disguise considerable variation between Member States. The Committee2.6. The Commission has given some figures to indicate regards as of particular significance the rate at which thethe potential scale of the problem. Without reforms the level percentage may peak in the early years in individual Memberof expenditure on state pension schemes could exceed 15 % of States.

France 12,1 12,2 13,1 15,0 16,0 15,8 N.A. 3,9

Ireland 4,6 4,5 5,0 6,7 7,6 8,3 9,0 4,4

Italy 14,2 14,1 14,3 14,9 15,9 15,7 13,9 1,7

Austria 14,5 14,4 14,8 15,7 17,6 17,0 15,1 3,1

Portugal 9,8 10,8 12,0 14,4 16,0 15,8 14,2 6,2

Finland (3) 11,3 10,9 11,6 14,0 15,7 16,0 16,0 4,7

Sweden 9,0 8,8 9,2 10,2 10,7 10,7 10,0 1,7

UK (7) 5,1 4,9 4,7 4,4 4,7 4,4 3,9 0,0

Source: EPC. (1) With the exception however of Spain, which used a higher decline in its unemployment rate (4 % in the long-term), and Portugal and Denmark which used changes in productivity of 3 % and 1,5 % respectively. (2) For Denmark, net of the supplementary semi-funded scheme (ATP), the increase from 2000 to the peak year is only 3,1 % of GDP. (3) Figures refer to the statutory pension scheme excluding the civil servants’ scheme ‘Beamtenversorgung’. (4) Provisional data. (5) Figures refer to the public pension scheme for the private sector and do not include the public pension schemes for civil servants and assimilated employees. (6) For the Netherlands the second tier is quite well developed. Such characteristics have a direct positive effect on the public pension scheme by reducing the burden of ageing populations on first pillar pensions. However, there is also an important indirect implication: taxes on future pension benefits (which are drawn from private funds) are expected to be quite high and may partially counterbalance the rise in public pension benefits. (7) The figures for the UK do not reflect the substantial increase in pensions announced recently. This change will increase the share of GDP devoted to public pension expenditure. Social assistance for pensioners has also been substantially increased and will be modified to reward private provision. The UK also has well-developed second and third pillar schemes. Taxes on future pension benefits drawn from private funds will partially counterbalance the rise in public pension expenditure.C 48/92 EN Official Journal of the European Communities 21.2.2002

2.7. The Committee believes that these forecasts, which the quality of the services provided. The Committee thereforearise from the growing imbalance between contributors and also emphasises the need to examine the various componentsbeneficiaries, must be addressed to ensure the sustainability of of health-care expenditure, with particular reference to expen-pension systems both for PAYG and funded schemes. diture on drugs, as the Committee has requested in a number of its opinions. The Committee has also expressed the view in a recent opinion that ‘the use of supplementary health insurance can and should be hailed as fundamentally beneficial’ (SOC/040 — Supplementary health insurance) (1).2.8. In fact the Social Protection Committee has expressedthe view that issue of sustainable pensions requires meeting atriple challenge: 2.10. The Committee believes that provided there is con- certed and co-ordinated action by Member States there is no need for undue pessimism regarding the ability of the— to safeguard the capacity of pension systems to meet Community to achieve a sustainable solution to the demo- their social aims of providing safe and adequate incomes graphic issues. It must also be borne in mind that the problem to retired persons and their dependants and, ensuring in is both a financial and a social issue. As the Committee has combination with health and long term care systems, already argued, investment in the social field is beneficial to decent living conditions for all elderly persons; economic development as a whole. The Economic Policy Committee’s report is significant here, as it calls for a reduction in debt to free up resources which can then be invested in social policies.— to maintain the financial stability of pension systems, so that the future impact of ageing on public finances does not jeopardise budgetary stability or lead to an unfair sharing of resources between the generations; and

3. The pension options

— to enhance the ability of pension systems to respond to the changing needs of society and individuals, thereby contributing to enhanced labour market flexibility, equal opportunities for men and women with regard to employ- 3.1. The Commission categorises the provision of pensions ment and social protection and a better adaptation of under three pillars in the EU: pension systems to individual needs.

— Pillar 1: The statutory pensions systems — (which are

generally financed on the Pay As You Go principle);

2.8.1. The Committee suggests that in the context of equal

opportunities and meeting individual needs special attention — Pillar 2: Funded occupational pension schemes — (whichshould be given to atypical workers. are generally tied to the employer or the sector);

— Pillar 3: Personal pension arrangements — (which are

2.9. In considering the financing implications the ESC generally provided by life assurance companies);agrees with the Social Protection Committee that the corre-lation between pension and cost of health care systems mustnot be overlooked. A higher proportion of older people in thegeneral population will not only lead to higher pension costs Pillars 2 and 3 are traditionally known as supplementarybut to higher health care costs as well including the impact of pensions.both physical disability and senile diseases. Health care cur-rently averages 7 % of GDP in the EU. 3.2. The advantages and disadvantages of each pillar were discussed in the Commission’s Green Paper ‘Supplementary Pensions in the Single Market’ issued in June 1997 (2).2.9.1. The Commission has indicated that the EconomicPolicy Committee is currently assessing the effect of ageing onhealth care costs which will provide more reliable estimates offuture costs. The Committee very much welcomes this initiat-ive while stressing that an approach based exclusively on (1) OJ C 204, 18.7.2000, p. 51.financial sustainability could be insufficient and thus jeopardise (2) COM(97) 283 final.21.2.2002 EN Official Journal of the European Communities C 48/93

3.3. The Pillar 1 schemes are by far the dominant method expectation that enhanced economic growth will lead to higherby which pensions are provided across the EU as a whole. levels of employment and higher incomes.However in three Member States, the Netherlands, UK andIreland, the Pillar 2 and 3 schemes are a major component ofpensions provision. 4.2.2. The demographic projections in their raw state relate the number of persons of working age to those of retirement age. It is incontrovertible that this ratio is going to change3.4. The Commission has clearly indicated that the level of towards a higher ratio of pensioners.dependency on each pillar is a matter for individual MemberStates. The Committee supports this view and believes thecrucial need is for each Member State to address the issue inthe manner most appropriate to its circumstances and tra- 4.2.3. The more important ratio however is between thoseditions. The aim must be to strike a balance that guarantees who are economically active and those receiving pensions.the achievement of social objectives and financial sustaina- Thus the relatively low current level of labour market partici-bility. This will only be possible if the reforms are agreed pation in the EU (although there is a fair degree of variationbetween governments and the social partners. across Member States) if projected into the future would reinforce the gloomy prognostications regarding the sustaina- bility of pensions.3.5. The Committee welcomes the fact that Member Stateshave started this process and that Member States are reportingto the Commission that they do not expect radical transform- 4.2.4. If however participation rates could be raised itations of their pension systems and in particular that it does would reduce the impact of the demographic problem — thenot involve an abandonment of the basic principles and social greater the improvement in employment rates the greater theaims. pensions impact. A sustained period of high economic growth would however be required to achieve this.

3.6. The Committee believes the setting of common objec-

tives and the use of commonly agreed indicators — combinedwith full use of the open co-ordination method — will 4.2.5. In the following point, we explore in more detail thecontribute to building a consensus between Member States on increase in labour market participation. The ESC would notenecessary reforms and provide the opportunity to share here that sustainable dynamic economic growth is necessaryexperience in this important area. The methods used to achieve for employment to increase. Important factors that can affectthese objectives will be a matter for each Member State under this are competitiveness, EU economic performance andthe subsidiarity principle. employment policy.

A coherent and consistent national and European approach is

also necessary to increase labour market participation, as is envisaged by the Luxembourg process. An important factor4. Improving the sustainability of pensions here is that complementary measures, such as childcare and career break options, increase possibilities for combining work and family.4.1. Against this background the key imperative is to ensurethe payment of future pensions irrespective of the method offinancing.

4.3. Increase in labour market participation rates

4.2. Impact of economic growth

4.3.1. A significant increase in labour market participation rates is one of the most powerful actions, which would improve the sustainability of pensions.4.2.1. Greater economic growth is not an end in itself buta means by which the resources are generated to be used toimprove living standards of all citizens. Thus the level ofaffordable expenditure including pensions cannot be totally 4.3.2. Although there is considerable variation betweeninsulated from general economic conditions. The rate of Member States as noted above average labour market partici-economic growth has a potentially significant influence on the pation rates in the EU are low by comparison with the US andsustainability of pensions. This arises particularly via the Japan.C 48/94 EN Official Journal of the European Communities 21.2.2002

4.3.3. However it must be acknowledged that this factor particularly for disabled people to enable them to enter thehas been known for many years but progress towards increas- workforce as many would wish to do.ing the rate has been modest.

4.3.4. The Lisbon Council set a target of 70 % against the

current 63 % to be achieved by 2010. It set a separate target 4.3.9. The Committee emphasises the importance offor women of ‘over 60 %’ as employment rates among women achieving these labour market participation targets because ofhave traditionally lagged behind those for men. the benefits which would result for pensions but stresses that other measures should be pursued in parallel to ensure success in the goal of achieving sustainability of pensions.In Stockholm, European heads of government stepped upthese objectives: by 2005 participation must be 67 %, and57 % for women. In addition, an objective of 50 % wasintroduced for older workers.

4.3.5. While the Committee supports the concept of

improving participation rates it believes based on past experi- 4.4. Reducing public debtence that it represents a major challenge to the EU MemberStates. Obviously a key factor would be a sustained rate ofeconomic growth in excess of 3 % p.a. but despite a goodperformance in 2000 this will not be achieved in the next fewyears . However it is hoped that in the medium term prospects 4.4.1. The Committee acknowledges that reduction offor growth and employment may improve. The Committee public debt and therefore debt servicing costs will strengthenbelieves that a successful combination of favourable macro the financial position of Member States. This will allow themeconomic conditions and sustained reform measures is needed more scope to support the financing costs of future pensions,to promote growth and employment. albeit that the impact will vary as between Member States.

4.3.6. The Committee considers that while there are occu-

pations where the possibility of early retirement is justified itagrees with the Social Protection Committee that the economic 4.4.2. The Stability and Growth Pact to which all Memberand social needs which caused early retirement to be regarded States must adhere including the reduction of public debt andas acceptable are now changing. Thus the practice whereby the generation of surpluses will therefore increase the capacityolder workers retired early although sometimes enabling to support pension schemes in the longer term. This wouldyounger workers to gain jobs or be retained in employment for example facilitate the creation of Reserve Funds (seehas been a factor in producing lower participation rates and paragraph 7.5).increased dependency ratios. The Committee suggests that thewhole subject of encouraging greater participation rates byolder workers requires a special study to develop appropriatestrategies to achieve this. 4.4.3. The Committee also draws attention to the import- ance of improving tax collection and in particular the elimin-4.3.7. The Committee supports the aim of increasing the ation of tax evasion as a contributor to Member States’female labour market participation rates but the Committee financial positions.points out that this will require the provision of strongersupport in relation to child-care facilities. In the opinion of theCommittee it is necessary to promote the reconciliation offamily and career needs to avoid a further fall in fertility rates.In fact an increase in fertility rates would be beneficial to thedemographic position. The Committee has dealt with fertilityrates in more detail in its Information Report on The Demo-graphic situation in the EU and future prospects (1). 4.5. Projections of public pension expenditure under the Lisbon scenario4.3.8. The Committee supports the view of the SocialProtection Committee that the new target for increasing theparticipation rate of older men and women is particularlyimportant. The Committee also believes that appropriate 4.5.1. The Economic Policy Committee has developed ainstruments are required to ensure training needs and flexible scenario on the basis of the Lisbon targets and asked Memberworking arrangements are provided for older workers and States to make another projection of expenditure on pensions in accordance with that scenario (see Table 3). As shown in the Table the difference in the maximum gap in debt growth(1) SOC/017 — Information Report ‘The demographic situation in as a percentage of GDP varies from 0 % to 2 % with the the EU and future prospects’ — CES 930/99 fin. exception of Greece where it reaches 4,2 %.21.2.2002 EN Official Journal of the European Communities C 48/95

Source: EPC. (1) For the Lisbon scenario, France assumed unemployment rates and active employment rates below the ones described above. The active employment rate is lower because no allowance is made for changes in pension eligibility requirements to increase labour force participation by the elderly. France’s assumptions provide a more optimistic scenario in the medium term (around 2010- 2020) whereas the opposite occurs in the longer term. Italy’s active employment rates are lower than those described in the general methodology, whereas Spain’s productivity growth is slightly higher after 2035. Portugal used the mean-variant population scenario rather than the high-variant scenario. (2) Belgium assumes an employment rate of 76,5 % taking into account tighter conditions for early retirement and long-term unemployment schemes, the increase in the participation rate of women (except for those below the age of 30) and the increase in the effective retirement age. An increase in the employment rate of younger people was not assumed as this would imply lower attendance rates in education. (3) For Denmark, net of the supplementary semi-funded scheme (ATP), the increase from 2000 to the peak year is only 1,6 % of GDP. (4) For Denmark, net of the supplementary semi-funded scheme (ATP), the increase from 2000 to the peak year is only 3,1 % of GDP. (5) Provisional data. (6) In the case of Luxembourg the current scenario is the same as the Lisbon scenario: this scenario assumes an unconstrained growth of real GDP of 4 % per year over the entire projection period which corresponds to the average growth of the last 40 years. Figures refer to the public pension scheme for the private sector and do not include the public pension schemes for civil servants and assimilated employees. (7) For the Netherlands the second tier is quite well developed. Such characteristics have a direct positive effect on the public pension scheme by reducing the burden of ageing populations on first tier pensions. However, there is also an important indirect implication: taxes on future pension benefits (which are drawn from the private funds) are expected to be quite high and may partially counterbalance the rise in public pension benefits. (8) The figures for the UK do not reflect the substantial increase in pensions announced recently. This change will increase the share of GDP devoted to public pension expenditure. Social assistance for pensioners has also been substantially increased and will be modified to reward private provision. The UK also has well-developed second and third pillar schemes. Taxes on future pension benefits drawn from private funds will partially counterbalance the rise in public pension expenditure.C 48/96 EN Official Journal of the European Communities 21.2.2002

4.5.2. It should be noted this scenario is based on quite This also seems entirely in keeping with the concept ofoptimistic assumptions including: intergenerational solidarity.

— annual GDP growth at or above 3 % on average in the 5.2. The Committee supports the view expressed by the period to 2007; Social Protection Committee that an unfair sharing of resources between the generations must be avoided. This also points to the need for early action to avoid burdening the coming— male and female participation rates converge to 83 % generations unduly. by 2045 (in most countries this would require later retirement); 5.3. Possible action fall under two broad headings:— male and female unemployment rates converge to 4 % by 2045; (a) improve the sustainability of PAYG schemes,

— projections for the working age population are taken

(b) supplement existing pension arrangements by the intro- from the ‘high scenario’ provided by EUROSTAT, and duction of a larger element of pre-funded arrangements (Pillars 2 and 3).— productivity levels and growth converge across the EU to match the US by 2050. US productivity growth for the first half of the current century is assumed at 1 % against These headings are not mutually exclusive. the current 2,3 %.

4.5.3. The Committee acknowledges that this very broadly 5.4. Improve the sustainability of PAYG schemebased scenario is a projection of the future rather than aforecast. Nevertheless it accepts the conclusion of the Econ-omic Policy Committee that while having the potential to In addition to the items already dealt with in Section 4 thismake a major contribution to addressing the financial impact could include the following depending on the circumstancesof ageing it will not by itself resolve the problem of financing of each Member State:long-term pensions. However, the Committee would empha-sise that, given the current deterioration in the global economicenvironment in terms of cyclical conditions and jobs, the (a) Increasing participation rates for older workers (see 7.3).economic and employment policy scenario set out abovemust, with justification, be considered optimistic. Hence, theCommittee feels there is an urgent need for a better-coordi- (b) Assess the possibility of increasing contribution rates (seenated European economic and employment strategy — involv- 7.4).ing all players — in order to boost growth and jobs.

(c) Creating reserve funds to cushion the ageing effect until

age cohorts realign to a lower age dependency level (see 7.5).

5. Actions to improve sustainability

5.1. The extent to which the EU population will continue

to age in future will have a significant effect on the sustaina- (e) Reviewing the structure of third level education which inbility of pensions. The current evidence is that increased some Member States unnecessarily delays entry intolongevity will be progressive so that it is essential to initiate labour market (see 7.7).action now to anticipate the extra costs that will arise. The EPChave already acknowledged that even in their optimisticscenario the outcome would not fully cover the financial (f) Reducing public debt to release resources to sustain theimpact of ageing and recent global developments heighten the pension system (see 4.4).risk of underachievement. Action now will prevent the costsof sustaining pension payments becoming insupportable sincethe additional costs can be spread over an extended period. (g) A combination of the above.21.2.2002 EN Official Journal of the European Communities C 48/97

5.5. In the context of the single market the Commission pany or category level, on the basis of agreements included inhas been taking steps to enable supplementary pension collective contracts, would be useful.schemes to be introduced without specifically promoting theirdevelopment. The Commission via its recent draft directivehas also sought to improve the protection of pension scheme 6.1.3. Taxation arrangements for funded pension schemesmembers by more rigorous control procedures, the provision are based on three different concepts among EU Memberof relevant information to improve transparency and an States:investment regime designed to deliver improved returns withincontrolled risk. (a) EET i.e. contributions exempt, investment income exempt and pensions taxed.5.6. Whilst a transition even partly from PAYG to a fundedsystem might be considered attractive to some States and has (b) ETT i.e. contributions exempt, investment income taxedbeen introduced for example in both Sweden and Italy, the and pensions taxed.social consequences have to be carefully considered. (c) TEE i.e. contributions taxed, investment income exempt and pensions exempt.5.7. This is because payments would have to be made totwo systems simultaneously. It would be unacceptable thatcurrent pensioner’s income be put at risk by diversion of The concept that if income is deferred (through pensioncontributions away from PAYG systems into the funding of contributions) then tax should also be deferred is logical. Alsofuture pensions. Nevertheless some level of pre-funding is given the larger share of GDP accruing to pensioners in thefeasible as demonstrated by Sweden and would make a future the total exemption of pensions from tax is likely to beworthwhile contribution to easing future costs. difficult to sustain.

5.8. The main attraction of funded schemes remains that 6.2. From the point of view of the single market it isthey are not dependent on a future relationship between important that speedy progress is made to deal with thecontributors and beneficiaries, which by definition cannot be problems caused by cross-border pension arrangements. Inaccurately predicted. Funds should be invested in a well this connection the recent Communication on Taxation fromdiversified portfolio to minimise risk but the placing of the Commission is welcomed and has already been the subjectrestrictive quantitative limits should be avoided. The Com- of a separate opinion from the Committee (2).mittee has produced an opinion on the Commission proposalfor a directive covering the activities of second pillarschemes (1). 7. General comments5.9. However given the relative importance of the Stateschemes the greatest effort needs to be concentrated on steps 7.1. Ensuring the payment of pensions to a steadily ageingto maintain their sustainability. population is one of the main challenges facing the EU. EU citizens must be able to expect that the necessary efforts will be made.

6. Taxation 7.2. The Committee’s main concern remains securing the

income of future pensioners. Pensioners are a vulnerable sector of society and their interests must be protected. The Committee6.1. The Committee suggests that Member States can use therefore strongly supports the view that appropriate actiontaxation to encourage action on pensions which they wish to should be taken to achieve this while respecting the need topromote. maintain intergenerational solidarity.

6.1.1. Tax relief on contributions can be used to encourage

individual financial provisions for personal pensions or other 7.3. Increasing participation rates for older workersforms of saving for retirement provision e.g. to supplementthe State system. 7.3.1. An increase in labour-market participation rates is very important for the financial sustainability of pensions. As6.1.2. Tax relief can also be used to encourage employers pointed out earlier, this rate is substantially lower for workersto introduce funded pension arrangements for their employees. between 55 and 64 than for other age groups. This is largelyThe development of supplementary pension schemes at com- due to arrangements enabling older workers to retire early.

(2) ECO/071 — The elimination of tax obstacles to the cross-border

These arrangements were introduced so that older workers encouraged if there is cohesion in the way flexibility is appliedcould give way to younger workers in a socially responsible under each of the pillars in each Member State. Later retirementmanner. This was necessitated by high unemployment. would have economic benefits while contributing to better and more secure pensions.

7.3.2. Views have changed since then. The labour-market

situation in many Member States has changed. The financialconsequences of early retirement arrangements are also weigh- 7.4. Assessing the possibility of increasing contribution ratesing ever more heavily.

7.4.1. The Committee accepts that increased contribution

rates from both employers and employees could be used to7.3.3. In previous opinions the ESC has already argued for improve the sustainability of pensions.a higher participation rate among older workers. Variousmeasures were proposed in the opinion on older workers: 7.4.2. The Committee is concerned however at the possible— an age-aware personnel policy; consequences of increasing contributions:

(a) It increases the cost of employment and is thus potentially

— tax incentives for employers to keep on older workers; in conflict with the aim of increasing labour market participation rates.— part-time pensions; (b) It is potentially inequitable in that workers would be asked to pay considerably more than the economic cost— tax incentives for employees to stay in work longer; of the benefits they would personally receive in the future as a result of the imbalance between contributors and beneficiaries in the middle years of this century.— flexible pension arrangements. (c) It could reduce the EU’s ability to compete for inter- nationally mobile inward investment.7.3.4. If the participation rate of older workers is to rise,the Committee sees no reason to harmonise the retirement agefor the time being. At present that is a national matter and (d) It could encourage a ‘brain drain’ from the EU of highlyshould remain so. skilled people.

7.4.3. The Committee believes therefore that any proposal

Finally, the Committee sees little point in a debate on raising to increase contributions should be assessed against the likelythe retirement age until the participation rate of older workers impact on employment.has been increased substantially, as the most importantindicator is the effective retirement age and not the legalretirement age.

7.5. Cushioning the increase in pension cost by the use of Reserve

Funds7.3.5. The Committee recommends therefore that flexibilitybe created so that those in good health and wishing to continueworking are provided with the opportunity and financial 7.5.1. The Committee suggests that one way of reinforcingincentive to do so in either a full-time capacity or on a reduced the sustainability of Pillar 1 schemes is, where possible, to setbasis. The possibility for a worker, after an appropriate age, to aside funds now which can be drawn on post 2020 to off-setreduce working hours progressively would cater for reduced the increase in cost.capacity and at the same time allow the worker to remainactive on a salary sufficient for his/her needs and defer thedrawing of actual pension. 7.5.2. Ireland is one of a number of Member States that have introduced this method. In 1998 the Irish Government announced revised pension arrangements. This included the7.3.6. This flexibility would have to exist in both State and establishment of the National Pension Reserve Fund to whichprivate sector schemes in parallel whereas currently the rules the Government is committed to contributing 1 % of GDPrelating to retirement flexibility within a Member State often annually. In addition the proceeds of recent privatisations havediffer between the pillars. Later retirement patterns may be been added to the fund. The fund will be invested under the21.2.2002 EN Official Journal of the European Communities C 48/99

supervision of an independent Board and used eventually to schemes to top up their pensions. Whilst there is virtuallyreduce the burden of funding State pension costs post 2025 universal coverage in the Netherlands for a variety of reasonsand is ‘ring fenced’ so that future Governments cannot divert including reluctance of employers to establish a scheme,the funds to other uses. workers in transient jobs etc. the coverage of workers in such schemes in the latter two countries is too low.

7.5.3. The Committee considers that ‘ring fencing’ is an

important safeguard which will protect pensioners by ensuringthat these funds cannot be used by a future administration for 7.8.4. This issue has been addressed recently in both the UK and Ireland. In the UK the Government has introducedother purposes. Stakeholder pensions. Under this system the Government has established a framework in which pension providers can offer Stakeholder pensions. Employers must co-operate with the7.5.4. This method is not a move to pre-funding per se but arrangement by implementing payroll deductions buta means of securing a more equitable balance between the employer contributions remain voluntary. In addition costsgenerations. are capped under the legislation to ensure the maximum amount possible actually is invested for the worker’s benefit. In effect the scheme delivers a portable savings plan for use in7.6. An option for improving the sustainability of pensions providing an eventual pension.is to modify the qualification criteria for future pensions. TheCommittee is aware that a number of Member States havemade this type of adjustment to the pension entitlement rules.The Committee does not see this as an area where general 7.8.5. The Committee suggests that the use of this type ofrecommendations are appropriate firstly because of the subsid- scheme might be useful for other Member States to consideriarity principle and secondly because any such action must be to supplement their State schemes.appropriate to the particular circumstances of the MemberState concerned and desirably discussed with the socialpartners.

7.9. Adapting pensions to a changing society

7.7. The Committee is aware that in some Member Statesthe structure of third level education delays unnecessarilythe entry of graduates into the labour market. The newdemographic situation makes it desirable that this be reviewed. 7.9.1. The Committee agrees with the Social ProtectionHowever the Committee stresses that this proposal is not Committee that attention needs to be directed at adaptingdesigned to reduce the level of education which, given pension systems to changing employment patterns and to thethe Lisbon Council aim of becoming the most competitive need to ensure gender equality.knowledge-based economy should, if anything, be enhanced.

7.9.2. Important considerations are involved and the Com-

mittee believes that there is much to be gained by sharing the7.8. Supplement state pensions with funded top-up schemes experience between Member States.

7.8.1. Many Member States consider that the promotion of

supplementary pension schemes can make a contribution to 7.9.3. A desired long term goal would be the individualis-the sustainability of their overall pension systems. Any such ation of pensions i.e. that pensions would be an entitlement offunds should be invested in a well diversified portfolio to the individual not as in some cases at present derived fromminimise risk but the imposition of restrictive quantitative dependency on another person. This would mainly affectlimits should be avoided. women. However because of their employment patterns e.g. periods out of work for child rearing, care would have to be taken not to leave them with inadequate pensions. Some Member States have successfully addressed this problem.7.8.2. Minimum regulatory standards to ensure the securityand sustainability of funded supplementary schemes havealready been proposed by the Commission. 7.9.4. There are a significant number of self-employed business people in the community who often do not make7.8.3. Supplementary pension schemes are particularly adequate pension provision for themselves and their depend-used in three Member States — the Netherlands, UK and ants and may not qualify for adequate provision under the firstIreland. In these countries the State pension (PAYG) is set at a pillar. Attention needs to be directed to ensuring this categoryrelatively low level and many workers rely on supplementary are adequately covered.C 48/100 EN Official Journal of the European Communities 21.2.2002

7.9.5. The Committee notes that some Member States countries themselves and the Union as a whole. Applicantsupport their elderly people in other ways in addition to the countries should be encouraged to assess the long-termprovision of a pension. This includes a variety of arrangements, viability of their pension arrangements and to initiate actionfor example, more favourable taxation, free electricity, free or to improve sustainability where necessary.reduced fares for public transport, tax relief for rent. TheCommittee believes that this type of support is particularlyeffective in relieving poverty among older citizens. 8. Conclusions

8.1. The Committee attaches the highest priority to the

protection of pensioners both present and future to ensure7.10. Issues required to be addressed in supplementary schemes that they enjoy a decent standard of living in retirement. The Committee commends the Commission therefore for directing the spotlight on this issue in the context of demographic and social change.7.10.1. One of the major problems with pension schemesin some countries is the long vesting period (up to 10 years)before a worker becomes entitled to his pension. This is clearly 8.2. The Committee is also pleased to note that Memberin conflict with the view that pensions are forms of deferred States are now actively involved in planning to improve thepay i.e. pension rights are earned each year in same way as sustainability of their pension payments. It is inappropriate topay. The Committee believes that long vesting periods should propose common solutions for Member States since their basicbe abolished. positions differ so much.

8.2.1. In this context the Committee believes that Member

7.10.2. The demographic factors, which effect PAYG States should examine the potential use of the use of sup-schemes, are also important for funded schemes. The main plementary schemes (the second and third pillars) as supportiveconsideration is that actuaries ought to be making timely measures but recognises that supplementary pensions are notadjustments to contribution rates to ensure adequate technical a panacea.reserves are being created to match longer life expectancies. 8.3. The Committee strongly emphasises the link between longevity and health and long term care costs as well as7.10.3. The Committee has already welcomed and com- pensions. The Committee welcomes the planned work by themented on the proposed Directive for Occupational Pension Economic Policy Committee to establish the likely long termschemes which seeks to facilitate cross-border operation of profile of these costs. The special costs of the disabled shouldPillar 2 schemes (1). not be overlooked.

8.4. The Committee believes there is also a need to modify

7.10.4. The above Directive does not deal with the essential pension arrangements to reflect changes in society itself andissue of taxation but the Commission has dealt with it in a welcomes the fact that this is clearly recognised in Commissionrecent Communication on which the ESC has already drawn communications.up an opinion (2). 8.5. The Committee believes that a major contribution to sustainability could come through improved economic performance — an increase in GDP growth rates could make it possible not just to reduce unemployment but to generate higher labour market participation. Achieving this will how-7.11. Enlargement ever be a major challenge and will require concerted action programmes focused on these targets. The work of the Economic Policy Committee is making a substantial contri- bution to a better understanding of the opportunities in this7.11.1. The Committee believes that the sustainability of area.pensions in the applicant countries is also a major issue inboth economic and social terms both for the applicant 8.6. The potential implications of increasing pension costs on Member States is so significant that the proposed use of the open method of co-ordination is to be warmly welcomed. The setting of common objectives with appropriate indicators will(1) OJ C 155, 29.5.2001, p. 26. reassure Member States that all other States are taking action(2) ECO/071 — The elimination of tax obstacles to cross-border and also provide a learning opportunity to transfer experience provision of occupational pensions — COM(2001) 214 final. from one Member State to another.21.2.2002 EN Official Journal of the European Communities C 48/101

8.7. The Committee recommends that the applicant 8.8. Finally the Committee stresses again the need forcountries be encouraged to undertake similar assessments of action now to address the crucial issue of the sustainability oftheir pension systems to assess long-term sustainability. pensions which is of vital concern to all existing and future pensioners in the EU.

Brussels, 29 November 2001.

The President of the Economic and Social Committee Göke FRERICHS

Opinion of the Economic and Social Committee on the ‘Communication from the Commission to the Council, the European Parliament and the Economic and Social Committee: Supporting national strategies for safe and sustainable pensions through an integrated approach’

(2002/C 48/23)

On 5 July 2001, the Commission decided to consult the Economic and Social Committee, under Article 262 of the Treaty establishing the European Community, on the above-mentioned communication.

The Section for Employment, Social Affairs and Citizenship, which was responsible for preparing the Committee’s work on the subject, adopted its opinion on 7 November 2001. The rapporteur was Ms Cassina.

At its 386th plenary session (meeting of 29 November 2001) the Economic and Social Committee adopted the following opinion by 92 votes in favour with one abstention.

1. Introduction 1.2. The discussions and assessment of the content of the

communication will provide input for a report for submission at the Laeken European Council (December 2001), when the Member States are to reach an agreement on the objectives and on the means of securing safe, sustainable pension systems in the EU. This should be done within a framework of voluntary cooperation, coordination, exchange of best practice1.1. In response to the mandate entrusted to it by the and comparable statistics, along the lines of the Commission’sStockholm (1) and Gothenburg (2) European Councils, on 3 July proposals in its 1999 communication on the more general2001 the Commission published a Communication (3) to the aspects of social protection (4).Council, the European Parliament and the Economic and SocialCommittee on ‘Supporting national strategies for safe andsustainable pensions through an integrated approach’. 1.3. Before it received the referral mentioned in point 1.1 above, the Economic and Social Committee had already decided to set up a subcommittee to draft an opinion on ‘Economic growth, taxation and sustainability of pension rights in the EU’. The subcommittee’s opinion will comment(1) ‘... the potential of the open method of coordination should be used to the full, particularly in the field of pensions, taking due account of the principle of subsidiarity.’(2) ‘... to prepare a progress report for the Laeken European Council, on the basis of a Commission communication setting out the objectives and working methods in the area of pensions’ ... (4) COM(1999) 347 final ‘A concerted strategy for modernising(3) COM(2001) 362 final. social protection’.